Options - Part 3 (2018)

Options - Part 3 (2018)

Overview

This eCourse consists of three modules. Module 1 shows the situations in which American options should be held to expiration or, in the case of an option on an income-yielding underlying asset, exercised early to capture dividend or interest income.

Module 2 looks at how the binomial technique is used to price derivatives such as American options where an equation such as Black-Scholes cannot be applied.

Module 3 looks at how Monte Carlo methods are used to price path dependent options, such as Asian options, barrier options, and lookback options, where a closed-form model such as Black-Scholes cannot be applied.

Objective

On completion of this course, you will be able to:
- Recognize how American options can be exercised any time before expiration
- Recall how time value may be lost if American options are exercised early
- Identify the circumstances in which it may be optimal to exercise an American option early
- Recognize how the binomial tree is built using up/down prices and risk-neutral probabilities
- Recall how to value an option by working backward through the binomial tree and adjusting nodes where necessary until the current option value is reached
- Recognize how Monte Carlo methods allow analysts to price a range of different options by randomly generating paths of future stock prices
- Identify the key stages in performing a Monte Carlo simulation
- Recognize the main types of path dependent option that can be priced using Monte Carlo methods